Social Security Reform: Experience of the Alternate Plans in Texas
(Letter Report, 02/26/99, GAO/HEHS-99-31).

Pursuant to a congressional request, GAO provided information on three
Texas counties' employee retirement plans; known as Alternate Plans,
focusing on: (1) comparing the principal features and benefits of these
plans with those of social security; and (2) simulating the retirement,
survivor, and disability benefits that individuals in varying
circumstances might receive under the Alternate Plans and under social
security.

GAO noted that: (1) while social security and the Alternate Plans offer
retirement, disability, and survivor benefits to qualified workers,
there are fundamental differences in the purpose and structure of the
two approaches; (2) Social Security is a social insurance program
designed to provide a basic level of retirement income to help retired
workers, disabled workers, and their dependents and survivors stay out
of poverty; (3) Social Security benefits are tilted to provide
relatively higher benefits to low-wage earners, and the benefits are
fully indexed to protect against inflation; (4) social security is a
pay-as-you-go system that is projected to produce a negative cash flow
in 2013 and become insolvent by 2032; (5) the Alternate Plans are
advance funded plans; the contributions made by workers and their
employers, which total 13.915 percent of workers' pay, and the earnings
made on those invested contributions are used to fund retirement
benefits; (6) the Alternate Plans' benefits are directly linked to
contributions, so that retirement income is based on accumulated
contributions and the earnings thereon; (7) at retirement, the worker
can take the money in the account as a lump sum or select from a number
of monthly payout options, including the purchase of a lifetime annuity;
(8) GAO found that certain features of social security, such as the
progressive benefit formula and the allowance for spousal benefits, are
important factors in providing larger benefits than the Alternate Plans
for low-wage earners, single-earner couples, and individuals with
dependents; (9) many median-wage earners, while initially receiving
higher benefits under the Alternate Plans, would also have received
larger benefits under social security after 4 and 12 years after
retirement, because social security benefits are indexed for inflation;
(10) the Alternate Plans provide larger benefits for higher-wage workers
than social security would, but in some cases, such as when spousal
benefits are involved, social security benefits could also exceed those
of the Alternate Plans; (11) survivor benefits often would be greater
under social security than under the Alternate Plans, especially when a
worker died at a relatively young age and had dependant children; (12)
with regard to disability benefits, all workers in GAO's simulations
would receive higher initial benefits under the Alternate Plans; and
(13) it is important to note that the Alternate Plans performance is not
necessarily indicative of how well a proposed system of individual
accounts with social security might perform.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-31
     TITLE:  Social Security Reform: Experience of the Alternate Plans 
             in Texas
      DATE:  02/26/99
   SUBJECT:  Social security benefits
             Comparative analysis
             Municipal employees
             Retirement benefits
             Disability benefits
IDENTIFIER:  Social Security Disability Insurance Program
             Galveston County (TX)
             Brazoria County (TX)
             Matagorda County (TX)
             
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Cover
================================================================ COVER


Report to the Chairman and Ranking Minority Member, Subcommittee on
Social Security, Committee on Ways and Means, House of
Representatives

February 1999

SOCIAL SECURITY REFORM -
EXPERIENCE OF THE ALTERNATE PLANS
IN TEXAS

GAO/HEHS-99-31

Alternate State and Local Pensions

(207011)


Abbreviations
=============================================================== ABBREV

  GDP - gross domestic product
  ABC - test

Letter
=============================================================== LETTER


B-279337

February 26, 1999

The Honorable E.  Clay Shaw
Chairman
The Honorable Robert T.  Matsui
Ranking Minority Member
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives

In 1981, the employees of three Texas counties--Galveston, Matagorda,
and Brazoria--withdrew from Social Security.\1 The counties replaced
Social Security with a system of individual accounts that provided
retirement, survivor, and disability benefits.  Social Security faces
a long-term financing shortfall, and some reformers have suggested
that the experience of these three counties demonstrates the
advantages of individual accounts as an element of Social Security
financing reform. 

Under a system of individual accounts within the Social Security
program, participants would be either required or allowed to build up
savings, depending on the reform proposal.  The accounts and the
earnings they accrued would belong to the individuals at retirement. 
In contrast, under the current system, employees and their employers
pay into the program, and benefits are calculated using a formula
that takes into account lifetime earnings, age, number of years
worked, marital status, and other factors.  Social Security is
largely financed on a pay-as-you-go basis under which payroll tax
revenues collected from today's workers are used to pay benefits for
today's retirees.  While individuals have "claims" on Social Security
in the sense of promised benefits, under the current program design,
changes to the program's revenues, benefits, or both will be
necessary to ensure the program's future financial balance and
sustainability.\2

At your request, we studied the benefits provided by the plans--known
as the Alternate Plans--created for the employees of the three Texas
counties.\3 We agreed to (1) compare the principal features and
benefits of these plans with those of Social Security and (2)
simulate the retirement, survivor, and disability benefits that
individuals in varying circumstances might receive under the
Alternate Plans and under Social Security.  While not all possible
scenarios can be simulated, our examples cover a range of likely
experiences.  To put both systems on an equal footing, we simulated
outcomes for individuals who would have spent their working careers
under either one or the other system.  We assessed benefits for
individuals retiring today and for those who went to work for the
counties at the time the Alternate Plans went into effect in 1981. 
We examined outcomes for individuals with 35-year and 45-year working
careers with the counties.  Because the Alternate Plans are
relatively new, we had to make some assumptions about how the plans'
investments would have performed before 1981 because those retiring
today would have started working for the counties before 1981.  We
assumed that the Alternate Plans' funds would have earned returns
equivalent to those of similar portfolios--government and corporate
bonds and preferred stocks--at the time.  We estimated outcomes for
workers with low, median, and high incomes on the basis of the
distribution of earnings for Galveston County employees.  Our low
earners are those at the bottom 10th percentile of the wage
distribution for Galveston County employees nearing retirement age,
and our high earners are those at the 90th percentile.\4 We also
assumed that workers retire at 65, the age at which full Social
Security benefits are available.  In reality, many workers elect to
receive reduced benefits at age 62, and many Texas workers may retire
even earlier.  Finally, our calculations assumed that future Social
Security retirement benefits will not be reduced in order to help
solve Social Security's long-term financing problem, although we did
take into account the scheduled increase in the normal retirement
age. 

The data we used in our analysis were derived from U.S.  government
data systems, the three Texas counties, administrators of the
Alternate Plans, and insurance industry sources.  We analyzed the
cost and benefit structures of the Alternate Plans as they existed in
1998.  We performed our work between October 1997 and December 1998
in accordance with generally accepted government auditing standards. 
For a more detailed discussion of our methodology, see appendix I. 


--------------------
\1 Before the Social Security Act was amended in 1983, state and
local governments that had previously participated in Social Security
were permitted to opt out. 

\2 The Social Security trustees estimate that either revenues will
need to be increased or benefits reduced by an amount equal to 2.19
percent of taxable payroll (above the current 12.4 percent rate), if
the system is to pay all promised benefits over the next 75 years. 
Any delay in taking action will result in an increase in the required
revenue increase or benefit reduction to ensure the financial
solvency of the program over the next 75 years.  This estimate is
based on Social Security's intermediate actuarial assumptions. 

\3 The Alternate Plans receive deferred tax treatment under sec.  457
of the Internal Revenue Code. 

\4 The earnings distribution of Galveston County employees is
somewhat narrower than that of the nation at large.  The median
income for Galveston County employees was $25,596 in 1998--about 82
percent of the national median wage.  However, incomes for low-wage
earners were one-third higher than those reported for the 10th
percentile of Social Security-covered workers, and high-wage earners'
incomes were 68 percent of the 90th percentile of wages nationally. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In general, while Social Security and the Alternate Plans offer
retirement, disability, and survivor benefits to qualified workers,
there are fundamental differences in the purpose and structure of the
two approaches.  Social Security is a social insurance program
designed, in part, to provide a basic level of retirement income to
help retired workers, disabled workers, and their dependents and
survivors stay out of poverty.  Social Security benefits are tilted
to provide relatively higher benefits to low-wage earners, and the
benefits are fully indexed to protect against inflation.  The program
also provides significant ancillary benefits to workers' dependents. 
Social Security is a pay-as-you-go system that is projected to
produce a negative cash flow in 2013 and become insolvent by 2032. 
To restore the program's financial balance over the next 75 years,
either annual program revenues would have to rise beginning in 1999
by 16 percent or annual benefit payments would have to fall beginning
in 1999 by 14 percent across the board.  In contrast, the Alternate
Plans are advance funded plans; that is, the contributions made by
workers and their employers, which total 13.915 percent of workers'
pay,\5 and the earnings made on those invested contributions are used
to fund retirement benefits.  The Alternate Plans' benefits are
directly linked to contributions, so that retirement income is based
on accumulated contributions and the earnings thereon.  At
retirement, the worker can take the money in the account as a lump
sum or select from a number of monthly payout options, including the
purchase of a lifetime annuity.  Like Social Security, the Alternate
Plans also offer insurance protection for the disabled and survivors. 

Our simulations of how workers for the three Texas counties and their
dependents might fare under the two systems revealed that outcomes
depend generally on individual circumstances and conditions.  In
general, we found that certain features of Social Security, such as
the progressive benefit formula and the allowance for spousal
benefits, are important factors in providing larger benefits than the
Alternate Plans for low-wage earners,\6 single-earner couples, and
individuals with dependents.  For example, our simulations showed
that low-wage earners retiring today after a 35-year career generally
would have qualified for higher retirement incomes had they been
under Social Security (that is, on the basis of promised benefit
levels) instead of the Alternate Plans.  Many median-wage earners in
our simulations, while initially receiving higher benefits under the
Alternate Plans, would also have received larger benefits under
Social Security after between 4 and 12 years after retirement,
because Social Security benefits are indexed for inflation.  The
Alternate Plans provide larger benefits for higher-wage workers than
Social Security would, but in some cases, such as when spousal
benefits are involved, Social Security benefits could also eventually
exceed those of the Alternate Plans.  Even Social Security's
cost-of-living adjustment feature would not lift higher earners'
benefits beyond those of the Alternate Plan participants until very
late in retirement.  Survivor benefits often would be greater under
Social Security than under the Alternate Plans, especially when a
worker died at a relatively young age and had dependent children. 
With regard to disability benefits, all workers in our simulations
would receive higher initial benefits under the Alternate Plans. 
These higher disability benefits can be traced primarily to the
annuitization of the existing account balances at the time of
disability and to the fact that the Alternate Plans replace 60
percent of wages at the time the disability occurs.  Low-income
workers with dependents and some median-income workers with
dependents would qualify for 60-percent income replacement under
Social Security.  Although the presence of dependents would narrow
the difference somewhat between Social Security and the Alternate
Plans in initial disability benefits, the Alternate Plans' initial
disability benefits would still likely exceed those from Social
Security because of the added value of the annuity. 

It is important to note that the Alternate Plans' performance is not
necessarily indicative of how well a proposed system of individual
accounts within Social Security might perform.  We looked at the two
approaches in isolation, whereas many Social Security reform
proposals that include individual accounts involve a "two-tiered
system" that combines a base defined benefit element with
supplemental individual accounts, whereby total retirement income
would come from the combination of these two tiers.  The Alternate
Plans have also followed a very conservative investment strategy that
has precluded investing in common stocks.  By restricting investments
to bonds and preferred stock, the Alternate Plans avoided the higher
risks associated with equity investments but also gave up the
opportunity for potentially higher returns.  Proposed reforms that
allow for individual accounts envision investment in equities. 
Finally, the sum of employer and employee contributions under the
Alternate Plans is somewhat higher than Social Security's payroll
taxes.  On the other hand, the Alternate Plans' benefits are fully
funded, while Social Security's promised benefits cannot be met
without increasing program revenues. 


--------------------
\5 Like Social Security, contributions to Alternate Plans are also
capped. 

\6 Low-wage earners, in the 10th percentile of the wage distribution
in the three Texas counties, earned $17,124 per year.  Median earners
had wages of $25,596 per year, and higher earners, in the 90th
percentile of the wage distribution, had wages of $51,263 per year. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Social Security is largely a pay-as-you-go, defined benefit system
under which taxes collected from current workers are used to pay the
benefits of current retirees.\7 Social Security is financed primarily
by a payroll tax of 12.4 percent on annual wages up to $72,600 (in
1999) split evenly between employees and employers or paid in full by
the self-employed.\8 Since 1940, Social Security has been providing
benefits to the nation's eligible retired workers, their dependents,
and the survivors of deceased workers.  In addition, since 1956, the
program has provided income protection for disabled workers and their
eligible dependents.  Today, the Social Security program covers over
145 million working Americans--96 percent of the workforce.  It is
the foundation of the nation's retirement income system and an
important provider of disability benefits.  Currently, 44 million
individuals receive Social Security benefits.\9


--------------------
\7 Revenues that exceed current expenditures are credited to the
Social Security Trust Fund to be used for future expenditures. 

\8 In 1997, payroll taxes accounted for 88.7 percent of Social
Security's revenue.  Interest income from the Treasury bonds in the
Social Security Trust Funds generated another 9.6 percent of Social
Security's revenue.  Taxes on Social Security income accounted for
the remaining 1.7 percent. 

\9 Of those receiving Social Security benefits in 1996, 61.5 percent
were retired workers, 24.7 percent were family members and survivors
of retired workers, 10.1 percent were disabled workers, and 3.9
percent were family members of disabled workers.  (Numbers exceed 100
percent because of rounding.)


      SOCIAL SECURITY BENEFIT
      ELIGIBILITY AND CALCULATION
---------------------------------------------------------- Letter :2.1

Social Security retirement benefits are calculated using the worker's
35 years of highest earnings in covered employment.  However,
benefits are not strictly proportional to earnings.  A progressive
benefit formula is applied so that low-wage workers receive, as a
monthly benefit, a larger percentage of their average monthly
lifetime earnings than do high-wage workers.  The benefit is adjusted
for the age at which the worker first begins to draw benefits.  To
receive Social Security retirement benefits, employees must be at
least 62 years old and have earned a certain number of credits for
work covered by Social Security.  Retirees are eligible for full
benefits at age 65--the normal retirement age--and those retiring at
62 currently receive 80 percent of their full benefit.  The age for
full benefit eligibility is scheduled to incrementally increase to
age 67 for those born between 1938 and 1960.\10 Since 1975, benefits
have been automatically adjusted each year to compensate for
increases in the cost of living.  Additionally, benefits are adjusted
when recipients aged 62 through 69 have earnings above a certain
threshold.\11

Individuals may be eligible for Social Security benefits on the basis
of their spouses' earnings.  For example, a married person who does
not qualify for Social Security retirement benefits may be eligible
for a spousal benefit that is worth up to 50 percent of the primary
earner's retirement benefit.  Spouses who do qualify for their own
Social Security retirement benefit but whose retirement benefit is
worth less than 50 percent of the primary earner's benefit are
eligible for both their own retirement and certain spousal benefits. 
Specifically, benefits for such dually eligible individuals are
calculated so that their retirement benefit and their spousal benefit
could add up to 50 percent of the primary earner's benefit.  In
practice, spouses receive either the value of their individual
benefit or the value equivalent to 50 percent of the primary earner's
benefit, whichever is higher. 

Under Social Security, retirement benefits can be paid to ex-spouses
if they were married to the worker for at least 10 years, are not
remarried, and are at least 62 years old.  A deceased worker's
survivors are eligible for benefits if the survivor is a spouse at
least 60 years old or a disabled spouse at least age 50, a parent
caring for an eligible child under age 16, an eligible child under
the age of 18, or a dependent parent.\12 Ex-spouses are eligible for
survivor benefits if they do not remarry before age 60 and meet other
qualifications for surviving spouses. 

Social Security's Disability Insurance program provides cash benefits
to disabled workers and their dependents.  To qualify for disability
benefits, the worker must be unable to engage in any substantial
gainful activity because of a medically determinable physical or
mental impairment that is expected to result in death or to last for
a continuous period of at least 12 months.  Disability benefits are
available after a 5-month waiting period beginning at the onset of
the disability.  To be eligible, the employee, if over age 30, must
have worked in Social Security-covered employment for at least 20 of
the 40 quarters immediately preceding the disability's onset.  If
under 31, the disabled worker must have had earnings in at least
one-half the quarters worked after he or she reached age 21, with a
minimum of six quarters.  Disabled worker benefits are automatically
converted to retired worker benefits when the disabled worker reaches
the normal retirement age. 


--------------------
\10 When the age for full benefits reaches 67, those retiring at 62
will receive only 70 percent of their full benefits. 

\11 In 1996, the earnings limit for those under age 65 was $8,280 a
year, and the earnings limit for those aged 65 through 69 was $12,500
a year.  For earnings above these amounts, recipients under age 65
lose $1 in benefits for every $2 earned, while recipients aged 65
through 69 lose $1 for every $3 earned. 

\12 Children aged 18 or older can also qualify for survivor benefits
if they became disabled before attaining age 22 or if they are
full-time elementary or secondary school students under the age of
19. 


      COVERAGE OF STATE AND LOCAL
      GOVERNMENT WORKERS UNDER
      SOCIAL SECURITY
---------------------------------------------------------- Letter :2.2

Workers for state and local governments were originally excluded from
Social Security because many were already covered by a state or local
government pension plan, and the federal government's constitutional
right to impose a tax on state and local governments was uncertain. 
In the 1950s, the Social Security Act was amended to allow state and
local governments the option of covering their employees.  Those
state and local governments that elected coverage were allowed to opt
out later if certain conditions were met.  However, the Congress
amended the Social Security Act in 1983 to prohibit state and local
governments from opting out of the program once they joined. 

In 1981, Galveston County officials, citing expected future increases
in the Social Security tax rate and wage base, notified the Social
Security Administration of the County's intent to withdraw from the
program.  County employees voted two to one in support of withdrawal. 
The neighboring counties of Brazoria and Matagorda followed
Galveston's lead and also withdrew from Social Security.  Rather than
simply eliminate the Social Security payroll taxes and the coverage
provided, the three Texas counties continued to collect these amounts
to create the Alternate Plans--deferred compensation plans that
include retirement, disability, and survivor insurance benefits.\13
The Alternate Plans are designed to replicate many of the features
found in the Social Security program.  Creators of the Alternate
Plans, however, wanted to replace Social Security's benefits package
with one that offered potentially higher returns, while still
providing a high level of benefit security.  Today, about 3,000
employees of the three Texas counties are covered by these plans.\14


--------------------
\13 Under deferred compensation plans, income that is invested is not
taxed when earned but rather when benefits are paid in retirement,
when, it is assumed, the individual's marginal tax rate will usually
be lower. 

\14 The Alternate Plans are a secondary source of retirement income
for the workers in the three Texas counties.  Their primary
retirement benefit is provided under the Texas County and District
Retirement System, another defined contribution plan, which also
provides disability and survivor benefits. 


   IMPORTANT DIFFERENCES EXIST
   BETWEEN SOCIAL SECURITY AND THE
   ALTERNATE PLANS
------------------------------------------------------------ Letter :3

While Social Security and the Alternate Plans offer a similar package
of benefits, there are a number of important differences between the
two approaches in the calculation of benefits and scope of coverage. 
The Alternate Plans' benefits are advance funded, while Social
Security's promised benefits are not.  As a defined benefit plan,
Social Security calculates benefits by formula, whereas the Alternate
Plans--defined contribution plans--determine benefits largely by the
accumulations in the beneficiary's retirement account.  Retirement
benefits under the Alternate Plans are thus based on contributions
and investment returns and are not adjusted to provide
proportionately larger benefits to low-income workers, as is the case
with Social Security.  Survivor benefits under the Alternate Plans
are not lifetime benefits, but a one-time life insurance payment made
to the worker's designated beneficiaries, along with the worker's
account balance; there are no additional benefits for dependents. 
Disability benefits under the Alternate Plans are equal to 60 percent
of the employee's wage at the time of disability, up to a maximum
benefit of $5,000 a month.  Workers are eligible to receive the value
of the employee's account at the time he or she becomes disabled.  At
that time, a new retirement account is established that pays an
amount equivalent to the employee and employer's contributions at
that time.  The Alternate Plans' disability benefits make no
allowances for dependents.  Social Security's disability benefits are
based on a modified benefit formula and include additional benefits
for the dependents of disabled workers. 


      FUNDING AND COVERAGE
---------------------------------------------------------- Letter :3.1

As is the case with Social Security, the Alternate Plans are funded
by payroll taxes collected from employers and employees.  Galveston
County employees, for example, contribute 6.13 percent of their gross
earnings toward their deferred compensation account.  The County
contributes 7.785 percent of a worker's gross compensation.  Total
contributions to the Alternate Plans in Galveston County today are
13.915 percent--somewhat higher than the 12.4 percent contributed by
employers and employees to Social Security.  A portion of the
County's contribution goes to pay for the employee's life and
disability insurance premiums (4.178 percent in 1998). 

The Alternate Plans were designed to give the employees a guaranteed
nominal annual return on their contributions of at least 4 percent. 
Therefore, the Alternate Plans' managers contracted with an insurance
company to purchase an annuity that guaranteed the minimum return. 
The portfolios holding the plans' contributions are invested only in
fixed-rate marketable securities (government bonds, corporate bonds,
and preferred stocks) and bank certificates of deposit.  Rates of
return on the portfolios for all of the Alternate Plans have ranged
widely over the years but currently are around 6 percent in nominal
terms. 

Social Security, on the other hand, is mostly a pay-as-you-go
program, but when revenues exceed outlays, as they currently do, the
surplus is credited to the Trust Funds in the form of nonmarketable
Treasury securities.  The funds earn interest but, unlike the
Alternate Plans, the interest income does not influence the amount of
Social Security benefits paid to retirees. 

Because virtually all work in the United States is covered by Social
Security, benefits are fully portable if the worker changes jobs.  If
participants in the Alternate Plans leave county employment, they can
either take their account balances with them or leave the account,
which will continue to earn the portfolio's rate of return.  The
Alternate Plans are tax-deferred plans, so if the employee elects to
cash out the account, he or she must pay income taxes on the
proceeds, although there is no penalty involved.  All distributions
of deferred compensation accounts are taxed at the employee's
marginal tax rate at the time of distribution.  Social Security
income is not taxed as long as an individual's income does not exceed
certain thresholds. 


      RETIREMENT BENEFITS
---------------------------------------------------------- Letter :3.2

There are also a number of significant differences in how retirement
income benefits are determined under the two approaches.  Because
Social Security is a defined benefit plan, it calculates benefits by
formula.  The Alternate Plans are defined contribution plans, so
benefits are directly related to the capital accumulations in the
beneficiaries' retirement accounts.  In addition, retirement benefits
are available at younger ages under the Alternate Plans than under
Social Security.  Moreover, unlike Social Security retirement
benefits, which are based on the 35 years of highest covered earnings
and weighted to replace a larger share of a low earner's wages,
retirement income benefits under the Alternate Plans depend solely on
contributions to the individual's account and the earnings on the
plans' investments.  Also, Social Security provides a separate
spousal benefit, and the Alternate Plans do not.  (See table 1.)



                          Table 1
          
            Principal Differences Between Social
             Security and the Alternate Plans'
                    Retirement Benefits

Feature         Social Security       Alternate Plans
--------------  --------------------  --------------------
Minimum         Employees must have   Employees are
eligibility     at least 40 quarters  immediately vested
requirements    of work in covered    and may take the
                employment. At age    balance of their
                65 employees are      deferred
                eligible for full     compensation
                benefits, and at age  accounts, which are
                62, for reduced       subject to taxation,
                benefits. The age     when leaving county
                for full benefits is  employment.
                scheduled to rise to  Employees may retire
                67 for those born     when their combined
                after 1959.           years of age and
                                      service equal 75 or
                                      at age 60, with at
                                      least 8 years of
                                      service.

Benefit         The progressive       The value of the
determination   formula used is       employee's account
                based on the 35       at the time of
                years of highest      retirement is based
                indexed earnings.     on the contributions
                Low-wage workers      of the employee and
                have a higher         employer and
                proportion of         interest income on
                lifetime earnings     the Plan's
                replaced. Married     investments. There
                couples are eligible  are no benefits for
                for a spousal         dependents. However,
                benefit of up to 50   married couples may
                percent of the        use the value of the
                worker benefit.       account to purchase
                Dependent children    a joint annuity.
                also eligible for
                benefits.

Benefit period  The benefit is a      The retiree has the
                lifetime annuity      option of purchasing
                that includes a       an individual or a
                benefit for a         joint and survivor
                surviving spouse      annuity.
                after the principal   Alternatively, the
                annuitant dies.       retiree may take a
                                      lump sum benefit
                                      that lasts until the
                                      account is depleted.

Cost-of-        Adjustments are       There are no
living          automatic and tied    adjustments,
adjustments     to the Consumer       although retirees
                Price Index.          may purchase a
                                      graduated annuity.
----------------------------------------------------------
The Alternate Plans do not ensure the preservation of retirement
benefits.  While Social Security provides retirees with a lifetime
annuity, the Alternate Plans allow retiring employees to choose
between taking a lump sum payout or purchasing an annuity with one of
several different payout options.  If the worker chooses to receive
income from the plan over his or her remaining lifetime or over that
of a spouse, he or she must purchase either an individual annuity or
a "joint and survivor" annuity.\15 But annuities generally are not
inflation-protected as they are under Social Security, so the
purchasing power of this retirement income could decline over time. 
To protect against future inflation, the retiree can arrange to
schedule the annuity payouts so that they are higher in the later
years, but this means accepting smaller benefits in the early years. 
In 1998, the plan for Brazoria County was modified to allow employees
to place their share of the contributions in equity funds.  It is too
soon to judge how this change would affect our comparisons. 


--------------------
\15 A joint and survivor annuity pays benefits for the remainder of
both the worker and his or her beneficiary's lifetime.  There is a
probability that payments will need to be made over a longer period,
so the monthly income from such an annuity is less than if the
annuity were only for the lifetime of the individual worker. 


      SURVIVOR BENEFITS
---------------------------------------------------------- Letter :3.3

Unlike Social Security, the Alternate Plans' survivor benefits can be
a one-time payment or a series of payments over a finite period of
time.  Under the Alternate Plans, if an employee dies, the surviving
beneficiary (anyone named as beneficiary by the worker) receives the
value of the employee's account at the time of death, plus a life
insurance benefit.  The life insurance benefit for a beneficiary of
an employee who dies while under age 70 is 300 percent of the
deceased worker's salary, with a minimum benefit of $50,000 and a
maximum of $150,000.  Beneficiaries of employees who die between the
ages of 70 and 74 are entitled to insurance proceeds up to 200
percent of the covered employee's annual earnings, with a minimum of
$33,330 and a maximum of $100,000.  Beneficiaries of employees who
die at age 75 or older are entitled to 130 percent of the employee's
annual earnings, with a minimum of $21,665 and a maximum of
$65,000.\16 These lump sum payments can be used by the beneficiary to
purchase a lifetime annuity.  Social Security survivor benefits, on
the other hand, are based on the worker's benefit at the time of
death, adjusted for the number of beneficiaries.  The benefit is paid
as an annuity, not a lump sum distribution, and is paid generally to
surviving spouses who are 60 years old or older or who have dependent
children.  (See table 2.)



                          Table 2
          
            Principal Differences Between Social
             Security and the Alternate Plans'
                     Survivor Benefits

Feature         Social Security       Alternate Plans\a
--------------  --------------------  --------------------
Eligibility     A survivor is a       A survivor is any
                widow(er) at least    person named as a
                60 years old or a     beneficiary.
                parent caring for an
                eligible child under
                age 16 or a
                dependent child
                under 18. Surviving
                disabled children,
                widows, and widowers
                are also eligible.

Method of       A beneficiary         The beneficiary has
payment         receives a lifetime   the option of taking
                annuity after age 60  a lump sum
                or until children     distribution or
                reach age 16.         purchasing an
                                      annuity.

Benefit         The benefit is based  Survivors of workers
calculation     on the worker's       who die before
                benefit at the time   reaching age 70
                of death and          receive three times
                adjusted for the      the deceased
                number of             worker's annual
                beneficiaries.        salary with a
                                      $150,000 maximum, as
                                      well as the value of
                                      the individual
                                      account at time of
                                      death.
----------------------------------------------------------
\a Full-time employees who have 8 years of service and retire at age
65 or older will also receive a "retired life reserve" benefit, which
is a paid-up death benefit worth $50,000. 


--------------------
\16 These benefits are for full-time workers.  For a part-time
worker, survivor benefits can range from 65 percent of the worker's
annual earnings to 150 percent, and the amount payable can range from
a minimum of $10,832 to a maximum of $75,000.  Survivor benefits for
workers differ slightly for employees of Matagorda County. 


      DISABILITY BENEFITS
---------------------------------------------------------- Letter :3.4

Under the Alternate Plans, workers are considered to be disabled if
they cannot work in their occupation for at least 24 months.  Social
Security, in contrast, requires that the individual not be able to
perform any substantial gainful activity because of a physical or
mental impairment for at least 12 months to qualify for benefits. 
After an initial 180-day waiting period, the Alternate Plans'
disability insurance pays 60 percent of an individual's base salary
until age 65 or until the individual returns to work.  The amounts
provided by Social Security's disability insurance vary, but they
follow the same formula as retirement benefits.  Of the first $505 of
monthly earnings, 90 percent is replaced, but the replacement rate
falls off rapidly after that.  Only 32 percent of monthly earnings
between $505 and $3,043 are replaced, and only 15 percent of earnings
above $3,043 are replaced.  Few disabled workers who do not have
dependents, therefore, would receive as much as 60 percent of their
wage or salary.  A totally disabled employee can receive a minimum
monthly benefit payment of $100 under the Alternate Plans, up to a
maximum benefit of $5,000 a month.  At the time the worker ceases
employment because of a disability, he or she can purchase an annuity
with the account balance.  A separate account is then set up by the
disability insurance provider, and the insurer pays an amount into
that account equivalent to the employer and employee contributions at
the time the employee stopped working.  Payments are made until the
employee reaches age 65.\17 Unlike Social Security, the Alternate
Plans provide no dependent benefits.  (See table 3.)



                          Table 3
          
            Principal Differences Between Social
             Security and the Alternate Plans'
                    Disability Benefits

Feature         Social Security       Alternate Plans
--------------  --------------------  --------------------
Eligibility     If over 30, the       Workers are
                beneficiary must      immediately
                have been in covered  qualified under
                work 20 of the last   long-term disability
                40 quarters; if 30    and term life
                or younger, the       insurance policies
                beneficiary must      and the group
                have been in covered  annuity contract
                work at least half    disability rider.
                of the quarters
                since age 21, with a
                minimum of 6
                quarters.

Definition of   Person must be        Person must be
disability      unable to perform     unable to perform
                substantial gainful   his or her usual
                work because of a     occupation for 24
                physical or mental    months because of a
                impairment expected   physical or mental
                to last at least 12   impairment.
                months.               Thereafter, the
                                      person must be
                                      unable to work in
                                      any occupation for
                                      which he or she is
                                      fit or becomes
                                      reasonably fit by
                                      education, training,
                                      or experience.\a

Waiting period  5 full calendar       180 days
                months

Calculation of  The benefit is        The benefit is 60
benefits        determined using a    percent of the
                modified retirement   worker's salary at
                benefit formula, and  the time of
                additional benefits   disability, up to
                are available for     $5,000 per month,
                eligible dependents.  plus the value of
                                      the individual
                                      account at the time
                                      of disability. In
                                      addition, the
                                      insurer makes
                                      monthly deposits
                                      into a separate
                                      retirement account
                                      equal to the worker
                                      and county's
                                      predisability
                                      contributions.
----------------------------------------------------------
\a Monthly income benefits for mental impairments may be limited to a
total of 12 months. 


--------------------
\17 A provision of the Alternate Plans requires the insurance company
to make monthly contributions to a new retirement account after the
worker becomes disabled.  The fixed contribution amount is based on
an average of the employee and employer contributions during the
18-month period before the onset of the disability.  In addition,
counties pay life insurance premiums for workers who are totally
disabled before the age of 59. 


   BENEFITS UNDER THE TWO PLANS
   VARY WITH INDIVIDUAL
   CIRCUMSTANCES
------------------------------------------------------------ Letter :4

Our comparisons of retirement, survivor, and disability benefits
under the two approaches show that outcomes generally depend on
individual circumstances and conditions.  For example, certain
features of Social Security, such as the tilt in the benefit formula
and the allowance for spousal benefits, are important factors in
providing larger benefits than the Alternate Plans for low-wage
earners, single-earner couples, and those with dependents.  The
Social Security benefit formula replaces a larger share of the wages
of a low earner than of a high earner.  As a result, low-wage earners
with relatively shorter careers in the three Texas counties would
have received larger initial benefits from Social Security than from
the Alternate Plans.  Social Security benefits also are adjusted for
inflation so their purchasing power is stable over time.  Thus, the
longer the period of retirement, the more likely it is that Social
Security will provide higher monthly benefits than a fixed annuity
purchased with the proceeds from the Alternate Plans.  The Social
Security spousal benefit also can significantly raise the retirement
incomes of couples when one partner had little or no earnings.  Under
the Alternate Plans, workers have assets that they may pass on to
designated beneficiaries.  Conversely, a worker has no assets from
Social Security to bequeath to his or her heirs.  Finally, the fact
that Social Security takes into account the number of dependents in
calculating survivor and disability benefits means that individual
family circumstances will be important in determining whether Social
Security or the Alternate Plans provides larger benefits. 


      SOCIAL SECURITY PROVIDES
      HIGHER RETIREMENT BENEFITS
      FOR MOST LOW WAGE EARNERS
---------------------------------------------------------- Letter :4.1

Our simulations comparing the retirement benefits for employees of
the three Texas counties show that the benefits from Social Security
and the Alternate Plans depend on the employee's earnings, the number
of years in the program, the presence of a spouse, the length of time
in retirement, and the year the worker retires.  In general, low-wage
workers and, to a lesser extent, median-wage earners would fare
better under Social Security.  High-wage earners can generally expect
to do better under the Alternate Plans, although if spousal benefits
are included, even high-wage workers could eventually receive higher
retirement income benefits from Social Security. 

Low-wage workers retiring at 65 today after a 35-year career in
county employment would receive a higher initial monthly benefit
under Social Security.  If the family is eligible for a Social
Security spousal benefit or if a joint and survivor annuity is
elected under the Alternate Plans, the gap increases.  Social
Security provides a spousal benefit of up to 50 percent of a worker's
benefit (for a spouse with a record of little or no earnings of his
or her own), while the Alternate Plans' spousal coverage through the
purchase of a joint and survivor annuity actually reduces the
couple's monthly income.  Low-wage earners with 35-year careers
retiring in 2016 are projected to receive roughly the same individual
initial monthly benefits under Social Security and the Alternate
Plans.  The Alternate Plans' benefits are relatively better for those
retiring in the future than for those retiring today because earnings
on the plans' investments were relatively low in the '60s and early
'70s as compared with the '90s.  (See table 4.)



                          Table 4
          
           Initial Monthly Retirement Benefits at
           the Social Security Normal Retirement
             Age Under Social Security and the
           Alternate Plans, 35-Year Work History,
                        1998 Dollars

          Social        Social     Alternate     Alternate
        Security      Security          Plan    Plan joint
Earn  individual  with spousal    individual  and survivor
er       benefit       benefit       annuity       annuity
----  ----------  ------------  ------------  ------------
1964-1998
----------------------------------------------------------
Low         $750        $1,125          $617          $542
Medi         992         1,488           923           810
 an
High       1,283         1,984         1,848         1,621

1981-2016\a
----------------------------------------------------------
Low          947         1,420           946           830
Medi       1,260         1,891         1,414         1,241
 an
High       1,737         2,605         2,771         2,431
----------------------------------------------------------
\a Period is 36 years, reflecting the increase to 66 in the Social
Security normal retirement age by 2024. 

Nevertheless, because Social Security benefits are indexed for
inflation, they would grow larger over time and would eventually
exceed the retirement benefits from the Alternate Plans, as the
latter remained constant.  (See figs.  1 and 2). 

   Figure 1:  Influence of
   Indexation on the Relationship
   Between the Value of Social
   Security and Alternate Plan
   Monthly Retirement Benefits for
   Workers Who Begin Receiving
   Benefits in 1999 After a
   35-Year Career, 1999-2017

   (See figure in printed
   edition.)

Note:  An inflation rate of 3.5 percent is assumed. 

   Figure 2:  Influence of
   Indexation on the Relationship
   Between the Value of Social
   Security and Alternate Plan
   Monthly Retirement Benefits for
   Workers Who Begin Receiving
   Benefits in 2017 After a
   35-Year Career, 2017-2035

   (See figure in printed
   edition.)

Note:  An inflation rate of 3.5 percent is assumed. 

The picture for low-wage workers changes somewhat if a 45-year career
is assumed.  Because all contributions and the investment earnings on
them determine the size of an Alternate Plan account, more years of
earnings in jobs covered by Alternate Plans lead to higher account
balances and, therefore, higher monthly benefits from the annuity. 
Social Security benefits, by contrast, are based on a formula using
the 35 years of highest earnings from all jobs.  With the longer work
history, initial individual benefits for low-wage workers would be
higher under the Alternate Plans than under Social Security,
although, if spousal benefits and joint and survivor annuities were
considered, Social Security benefits would again be larger.  (See
table 5.)



                          Table 5
          
           Initial Monthly Retirement Benefits at
           the Social Security Normal Retirement
             Age Under Social Security and the
           Alternate Plans, 45-Year Work History,
                        1998 Dollars

          Social        Social     Alternate     Alternate
        Security      Security          Plan    Plan joint
Earn  individual  with spousal    individual  and survivor
er       benefit       benefit       annuity       annuity
----  ----------  ------------  ------------  ------------
1964-2008
----------------------------------------------------------
Low         $872        $1,308          $982          $861
Medi       1,157         1,735         1,469         1,289
 an
High       1,575         2,363         3,024         2,653

1981-2026\a
----------------------------------------------------------
Low        1,028         1,542         1,366         1,198
Medi       1,367         2,050         2,024         1,775
 an
High       1,898         2,847         4,089         3,587
----------------------------------------------------------
\a Period is 36 years, reflecting the increase to 66 in the Social
Security normal retirement age by 2024. 

Even the higher individual benefits would not be permanent, as
indexation would ultimately close the gap.  For low-wage workers
retiring in 2008, however, the gap would be closed in 4 years, while
for those retiring in 2026, the gap would be closed in 9 years. 
Thereafter, Social Security monthly benefits would be higher.  (See
figs.  3 and 4.)

   Figure 3:  Influence of
   Indexation on the Relationship
   Between the Value of Social
   Security and Alternate Plan
   Monthly Retirement Benefits for
   Workers Who Begin Receiving
   Benefits in 2009 After a
   45-Year Career, 2009-2027

   (See figure in printed
   edition.)

Note:  An inflation rate of 3.5 percent is assumed. 

   Figure 4:  Influence of
   Indexation on the Relationship
   Between the Value of Social
   Security and Alternate Plan
   Monthly Retirement Benefits for
   Workers Who Begin Receiving
   Benefits in 2027 After a
   45-Year Career, 2027-2045

   (See figure in printed
   edition.)

Note:  An inflation rate of 3.5 percent is assumed. 

For median-wage earners, Social Security initial benefits are higher
when spousal benefits are included.  Individual benefits--even when
they start out lower--eventually catch up to the Alternate Plans'
benefits, but it does take longer for median-wage earners than for
low-wage earners.  After 7 years of retirement Social Security
benefits would catch up to Alternate Plan benefits for median-wage
earners retiring in 2008 after a 45-year career with the county
assuming Social Security was indexed at 3.5 percent.  For those with
45-year careers retiring in 2026, it would take about 13 years for
Social Security individual retirement benefits to overtake those of
the Alternate Plans.  High-income workers, in general, would probably
do better under the Alternate Plans, although consideration of
spousal benefits or coverage also could lead to higher benefits under
Social Security through indexation of benefits--at least for those
with 35-year careers. 

We used 35- and 45-year work histories to approximate working
careers.  We recognize that many people have shorter or less
continuous careers.  For example, in 1993 the average 62-year-old
woman spent only 25 years in the workforce, compared with 36 years
for the average 62-year-old man.  Both men and women leave the
workforce temporarily for a variety of reasons, such as to return to
school or to raise children.  Fewer years and less continuity would
influence the pattern of benefits under both plans.  We simulated
outcomes for workers who left the labor force for either 5 or 10
years early in their careers (at age 25).  Under both Social Security
and the Alternate Plans, retirement benefits were reduced.  However,
the reduction was larger under the Alternate Plans because the size
of the accounts at retirement is sensitive to when the contributions
are made.  Monies not contributed early in the worker's career lose
the benefits from compounding, leading to a significantly lower
account balance at retirement.  Social Security benefits are also
reduced, but because they are based on the earners' 35 years of
highest income and are not affected by compounding, the impact on
retirement income is less. 

This simulation shows that the relative "superiority" of the two
approaches depends on individual circumstances.  These simulations
are not meant to portray a "typical" worker, but rather to
demonstrate the importance of particular factors in determining
relative benefits from the two approaches.  For example, currently
only about 7 percent of Social Security benefits are spousal
benefits, and that percentage is expected to decline over time as
more women become eligible for benefits on the basis of their own
earnings.  It is also true that Social Security benefits are reduced
on the death of the retired worker, while the joint and survivor
annuity under the Alternate Plans could be structured to provide
constant benefits.  Nonetheless, for some county workers Social
Security retirement benefits would probably have exceeded those
available from the Alternate Plans. 


      PRESENCE OF DEPENDENTS
      AFFECTS COMPARISONS OF
      SURVIVOR BENEFITS
---------------------------------------------------------- Letter :4.2

With respect to survivor benefits, our simulations indicated that, in
cases in which the surviving spouse was left with two dependent
children under age 16, benefits would usually be higher under Social
Security because Social Security takes the number of dependents into
account when computing the total family monthly benefit.  For
example, if a low-wage worker died at age 45, our simulations
indicate a surviving spouse with two dependent children would receive
$1,602 per month, while under the Alternate Plans, the family would
receive only $831 per month on the basis of annuitizing lump sum
benefits.  (See table 6.)



                          Table 6
          
          Initial Monthly Survivor Benefits Under
          Social Security and the Alternate Plans
           for a Worker Beginning a Career at Age
                21, in 1981 in 1998 Dollars

                 Worker's age at time of death
      ----------------------------------------------------
Earn
er    21\a    25    30    35    40    45    50    55  60\b
----  ----  ----  ----  ----  ----  ----  ----  ----  ----
Initial Social Security benefits with two dependents
----------------------------------------------------------
Low      0  $1,2  $1,3  $1,4  $1,5  $1,6  $1,6  $1,7  $1,0
              71    66    08    50    02    64    20    13
Medi     0  1,68  1,81  1,87  2,06  2,13  2,21  2,29  1,34
 an            6     8     7     9     8     9     2     8
High     0  2,37  2,53  2,58  2,83  2,92  3,04  3,16  1,86
               3     5     9     2     2     3     0     9

Alternate Plan survivor benefits\c
----------------------------------------------------------
Low   $477   559   635   582   680   831  1,01  1,22  1,49
                                             1     5     4
Medi   713   837   948   869  1,01  1,24  1,51  1,83  2,21
 an                              7     3     2     1     9
High  1,42  1,62  1,83  1,69  2,03  2,49  3,02  3,66  4,47
         7     8     0     7     6     0     9     7     1
----------------------------------------------------------
\a Assumes worker dies 12 months after beginning first job for pay. 

\b Benefits at age 60 assume no children under age 16. 

\c Assumes life insurance and individual account proceeds are used to
purchase individual life annuities. 

On the other hand, if there were no dependent children, the surviving
spouse would not be eligible for survivor benefits under Social
Security until age 60, whereas under the Alternate Plans, the
surviving spouse would immediately be eligible to receive three times
the worker's salary plus any dollar amounts in the worker's
retirement income account.  The Alternate Plans' survivor benefits
would also be higher in cases in which the worker died late in his or
her career.  The survivor of a low-wage worker who died at age 60
with no dependents would receive $1,013 per month under Social
Security, whereas the survivor could receive a lifetime monthly
benefit of $1,494 under the Alternate Plans if he or she chose to use
the proceeds to buy an annuity.  Again, in about a dozen years,
increases in benefits due to cost-of-living adjustments would lead to
larger monthly benefits under Social Security than under the
Alternate Plans.  In those cases in which the worker died before
working enough quarters to qualify for Social Security benefits, the
surviving spouse would not be eligible for survivor benefits.  Under
the Alternate Plans, however, the survivor is immediately eligible to
receive three times the employee's wage and any account accumulations
regardless of how long the employee worked. 


      ALTERNATE PLANS PROVIDE
      HIGHER DISABILITY BENEFITS
---------------------------------------------------------- Letter :4.3

Because the Alternate Plans replace 60 percent of a disabled worker's
wage or salary and because disabled workers can also annuitize their
account balances at the time of disability, the Alternate Plans often
provide substantially better disability benefits than Social
Security.  This is especially true when no dependents are involved. 
Indexation of Social Security benefits for inflation can eventually
close the gap, but it could take over 20 years to do so.  For
example, a 26-year-old low-income worker with no dependents would
receive $711 monthly under Social Security, but $1,086 from the
Alternate Plans.  It would take a dozen years for indexation (at 3.5
percent per year) to raise the Social Security initial benefit to
that received under the Alternate Plans.  For a high-income
26-year-old, it would take more than 25 years to close the gap. 

Although the Alternate Plans still provide a larger initial monthly
benefit in all the cases we simulated, the differences were narrowed
when dependents were involved.  Nevertheless, for high earners, even
those with dependents, the Alternate Plans provided larger benefits,
and indexation would not close the gap for 15 to 20 years.  (See
table 7.)



                          Table 7
          
            Disability Benefits for 21-Year-Old
          Workers Entering the Labor Force in 1981
          Under Social Security and the Alternate
                   Plans, in 1998 Dollars

               Worker's age at time of disability
      ----------------------------------------------------
Bene
fit
type    21    25    30    35    40    45    50    55    60
----  ----  ----  ----  ----  ----  ----  ----  ----  ----
Low earner
----------------------------------------------------------
Soci     0  $711  $752  $788  $877  $912  $951  $983  $1,0
 al                                                     13
 Sec
 uri
 ty
 ind
 ivi
 dua
 l
Soci     0  1,06  1,12  1,18  1,31  1,36  1,42  1,47  1,52
 al            7     8     3     6     7     6     5     0
 Sec
 uri
 ty
 wit
 h
 dep
 end
 ent
Alte  $829  1,08  1,24  1,34  1,47  1,62  1,77  1,92  2,10
 rna           6     2     6     3     0     1     6     6
 te
 Pla
 ns

Median earner
----------------------------------------------------------
Soci     0   941   996  1,04  1,16  1,21  1,26  1,31  1,34
 al                        8     9     6     8     0     8
 Sec
 uri
 ty
 ind
 ivi
 dua
 l
Soci     0  1,41  1,49  1,57  1,75  1,82  1,90  1,96  2,02
 al            2     4     3     3     4     2     5     2
 Sec
 uri
 ty
 wit
 h
 dep
 end
 ent
Alte  1,23  1,62  1,85  2,01  2,20  2,42  2,64  2,87  3,14
 rna     7     5     6     2     1     1     8     9     7
 te
 Pla
 ns

High earner
----------------------------------------------------------
Soci     0  1,33  1,40  1,45  1,60  1,66  1,73  1,80  1,86
 al            5     9     9     8     6     9     6     9
 Sec
 uri
 ty
 ind
 ivi
 dua
 l
Soci     0  2,00  2,11  2,18  2,41  2,49  2,60  2,70  2,80
 al            3     3     9     2     9     8     8     4
 Sec
 uri
 ty
 wit
 h
 dep
 end
 ent
Alte  2,47  3,25  3,71  4,03  4,40  4,85  5,30  5,76  6,30
 rna     9     3     8     0     9     0     2     6     4
 te
 Pla
 ns
----------------------------------------------------------
The type of disability a worker has also influences how he or she
fares under the two systems.  Benefits for workers with "mental or
nervous disorders" are limited to 12 months under the Alternate
Plans.  Workers with such disabilities would receive higher benefits
under Social Security if their condition lasted over 12 months
because Social Security does not limit benefits on the basis of
impairment.\18


--------------------
\18 In 1997, over 30 percent of disabled workers receiving Social
Security benefits had some sort of mental disorder, including mental
retardation. 


   OBSERVATIONS
------------------------------------------------------------ Letter :5

Given the inherent differences between the two systems, our results
suggest that benefits primarily depend on individual circumstances. 
Social Security was designed, in part, to protect low earners and
their families, and indeed low-wage earners generally would do better
under Social Security.  Moreover, while individual circumstances play
a role, particular features of Social Security, such as the spousal
benefit and automatic cost-of-living adjustments, often result in
larger Social Security benefits to recipients than the benefits
available under the Alternate Plans.  In addition, when dependent
children are involved, survivor benefits can be higher under Social
Security.  Because the Alternate Plans do not tilt benefits in favor
of low-wage earners, they can provide better benefits for high-wage
workers.  In terms of disability benefits, the Alternate Plans
generally provide higher initial monthly benefits, especially for
high-income workers. 

It is important to keep the results of our analysis in perspective. 
Our results reflect the specific features and conditions of the
Alternate Plans and should not be construed as an analysis of the
potential for individual accounts in general.  For example, in an
effort to mirror the "safety" of Social Security, the Alternate Plans
have followed a conservative investment strategy wherein investments
in common stocks are avoided.  As a result, the Alternate Plans'
investments have had low returns--especially relative to those from
the equities markets.  Also, our projections of future Social
Security benefits assume the benefits available today will be
available in the future.  Social Security benefits in the future
could certainly be less than those we simulate depending on the
reforms that are implemented to address the system's long-term
shortfall.  Finally, many of the proposals for individual accounts do
not call for the complete replacement of Social Security but rather
provide for a two-tier system that combines the safety net, social
insurance aspect of Social Security with the promise of higher
returns from individual accounts. 

Overall, our analysis suggests that several of Social Security's
features make an important difference to the relatively less
well-off, to single-earner married couples, and to families with
dependent children.  How these features are treated in any changes to
Social Security could have important implications for these groups. 


   AGENCY AND OTHER COMMENTS AND
   OUR RESPONSE
------------------------------------------------------------ Letter :6

We shared a draft of this report with Social Security personnel
familiar with the program's benefit structure, outside retirement
income specialists, and individuals responsible for administering the
Alternate Plans.  We received technical comments from several
reviewers and incorporated the comments as appropriate. 
Administrators for the Alternate Plans also provided us with updated
figures, which we used in calculating benefits.  In addition, these
administrators pointed out that we should use the annuitized values
of the accounts at the time of the disability to calculate the
Alternate Plans disability benefits.  We incorporated those changes. 

The administrators also noted that they were in the process of
introducing a number of changes to the Alternate Plans that would
improve benefits.  They told us that they were introducing an annuity
that provided for a 2- to 3-percent annual adjustment to protect
against inflation.  The administrators also said they were in the
process of adding new benefits for surviving spouses and dependent
children.  The spouse would receive a lifetime benefit of 30 percent
of the deceased worker's income, and dependent children would receive
an additional 30 percent.  How much these benefits would cost had not
been determined, and it was not clear how they would affect our
comparisons. 

Finally, the Alternate Plans administrators told us that, in their
view, we should have used the average returns that the plans'
investments made in the past 17 years in projecting future returns. 
We disagree.  Returns on fixed income portfolios have declined
significantly since the 1980s, and forecasts of future returns on the
assets in fixed income portfolios do not envision a return to those
higher levels.  The projections we employed were for an asset whose
performance has closely mirrored the performance of the Alternate
Plans' investments.  We believe that is a more accurate estimate. 


---------------------------------------------------------- Letter :6.1

We are providing copies of this report to the Commissioner of Social
Security, officials of organizations and state and local governments
that we worked with, and other interested congressional parties. 
Copies will also be made available to others upon request.  Please
contact me at (202) 512-7215 if you have any questions about this
report.  Other major contributors to this report are listed in
appendix III. 

Barbara D.  Bovbjerg
Associate Director, Income Security Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

In order to compare potential retirement, survivor, and disability
benefits under the Alternate Plans and Social Security, we simulated
the work histories of county employees who had relatively low,
median, or high earnings.  We classified employees as low earners if
they were at the 10th percentile of the wage distribution and as high
earners if they were at the 90th percentile.  Median earners are in
the middle of the distribution (half earn more and half earn less). 
We used the 1998 wage distribution of Galveston County employees
nearing retirement to determine low, median, and high earnings: 
$17,124, $25,596, and $51,263, respectively.  Nationally, low,
median, and high earnings were $13,000, $31,200 and $75,000.  Low
earners in Galveston County, therefore, had wages nearly one-third
higher than those in the 10th percentile nationally, but the wages of
high earners in Galveston were about 68 percent of those of the 90th
percentile earners nationally; median wages of the Galveston County
workers were 82 percent of the national median. 

In order to calculate Alternate Plans and Social Security benefits
for our illustrative employees, we created earnings and contributions
histories for these workers.  We used a model of earnings growth over
workers' careers to reflect the fact that wage income does not grow
linearly over a working lifetime, but rather that wage growth
resembles an "s"- shaped curve.  This curve reflects more rapid
growth during the years when an individual's productivity grows
fastest and slower wage increases as the worker nears the end of his
or her career.  We used the earnings for workers nearing retirement
in 1998 to project the nominal wages of such workers back to the
beginning of their careers.  We also used the model to project
earnings experiences for those retiring in the future.  We projected
earnings at age 65 for workers retiring in the future in the three
income classes by taking the wage distribution for 1998 earnings and
inflating the earnings by nominal wage growth to the future
retirement years, using the Social Security Trustees' Intermediate
Cost Assumptions (see app.  II).  We applied the model to create the
wage histories.  The coefficients used to create the earnings
histories were developed and reported in T.  Hungerford and G. 
Solon, "Sheepskin Effects in the Returns to Education," Review of
Economics and Statistics, 69(1), 1987.  While actual earnings
histories may have greater diversity over time than the wages
produced by this model, this methodology allowed us to provide
illustrative earnings patterns. 

To compute expected retirement, survivor, and disability benefits
under the Alternate Plans, we calculated the expected balances in the
accounts at the time of retirement, death, or onset of disability. 
Account balances depend on earnings, contributions, and investment
income.  We used the actual contribution rates that were in effect
when the Alternate Plans began (Social Security payroll tax rates at
the time) and adjusted the rates as they changed over time. 
Similarly, in projecting what the contributions would have been if
the Alternate Plans had been in effect before 1981, we used the
corresponding Social Security payroll tax rate.  The contribution
rates for the three counties differ only slightly, so we used the
Galveston County contribution rates in generating our estimates.  For
future years, we assumed that current contribution rates would remain
in effect. 

To arrive at the investment income, we obtained data on the interest
rates earned on assets purchased by the Alternate Plans since 1981. 
To calculate the potential account balances for workers who entered
county employment before 1981 or for future periods, we had to make
some extrapolations.  For the period 1963 to 1980, the funds'
portfolio manager was able to provide us with the investment income
on similar types of investment vehicles offered by the firm.  In
projecting future earnings, we found that Social Security special
Treasury securities were another fixed income asset whose earnings
closely paralleled the experience of the Alternate Plans' portfolios. 
The special Treasury securities issued to the Social Security Trust
Funds closely mirrored the Alternate Plans' investment earnings
history.  We used Intermediate Assumptions' interest rate forecasts
for the special Treasury securities developed for the Social Security
Trustees 1998 Annual Report.  To calculate Social Security benefits,
we employed the Social Security Benefit Estimate Program for Personal
Computers, known as the ANYPIA program, which is available on-line at
www.ssa.gov. 

Finally, to calculate retirement and survivor benefits under the
Alternate Plans, we calculated the monthly benefits that retirees or
survivors would receive if they took their lump sum distributions and
purchased either an individual life or a joint and survivor annuity. 
To estimate the monthly benefits, we obtained the annuity factors
from the Alternate Plans' insurance and annuity providers.  We also
received annuity factors from the Social Security Administration to
calculate the lifetime monthly retirement benefits. 

Our simulations made a number of simplifying assumptions.  We do not
represent the simulations we undertook to be "typical," but rather as
illustrative of how workers and their families might fare under a
range of circumstances.  We assumed that individuals work
continuously at one job for their entire working lives.  We simulated
35-year and 45-year working lives and assumed that people retire at
the normal Social Security retirement age.  In reality, many
individuals have very discontinuous work histories, work at many
different places, and retire before the normal retirement age.  Many
people elect to take Social Security benefits when they first become
eligible at age 62.  We also assumed that Alternate Plan
beneficiaries annuitized their lump sums, although currently very few
elect life annuities.  We made this assumption in order to put the
two systems on an equal footing for benefit comparability. 


SOCIAL SECURITY TRUSTEES'
INTERMEDIATE COST ASSUMPTIONS
========================================================== Appendix II

                                Average annual percentage change
       ----------------------------------------------------------------------------------
                      Average                                                     Average
                       annual                             Average     Average      annual
Calen                 wage in    Consumer   Real-wage      annual      annual  percentage
dar                   covered       price  differenti    interest  unemployme    in labor
year   Real GDP\a  employment     index\b        al\c      rate\d   nt rate\e     force\f
-----  ----------  ----------  ----------  ----------  ----------  ----------  ----------
1998          2.5         3.3         1.4         1.9         5.8         4.8         1.0
1999          2.0         3.4         2.4         1.0         5.4         5.0         0.9
2000          2.0         3.8         2.6         1.3         5.6         5.3         1.0
2001          2.0         3.6         2.7         0.9         5.9         5.5         1.0
2002          1.9         3.7         2.8         0.9         6.0         5.7         0.9
2003          1.9         4.1         3.1         1.0         6.1         5.8         0.7
2004          1.9         4.4         3.2         1.2         6.2         5.9         0.7
2005          1.9         4.4         3.4         1.0         6.3         5.9         0.8
2006          2.0         4.4         3.5         0.9         6.4         6.0         0.9
2007          2.0         4.4         3.5         0.9         6.3         6.0         0.9
2008          1.8         4.5         3.5         1.0         6.3         6.0         0.6
2009          1.8         4.5         3.5         1.0         6.3         6.0         0.6
2010          1.8         4.5         3.5         1.0         6.3         6.0         0.6
2011          1.7         4.5         3.5         1.0         6.3         6.0         0.6
2012          1.6         4.5         3.5         1.0         6.3         6.0         0.4
2013          1.5         4.4         3.5         0.9         6.3         6.0         0.3
2014          1.5         4.4         3.5         0.9         6.3         6.0         0.3
2015          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2016          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2017          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2018          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2019          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2020          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2021          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2022          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2023          1.2         4.4         3.5         0.9         6.3         6.0           0
2024          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2025          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2026          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2027          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2028          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2029          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2030          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2031          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2032          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2033          1.5         4.4         3.5         0.9         6.3         6.0         0.3
2034          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2035          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2036          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2037          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2038          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2039          1.4         4.4         3.5         0.9         6.3         6.0         0.3
2040          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2041          1.4         4.4         3.5         0.9         6.3         6.0         0.2
2042          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2043          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2044          1.3         4.4         3.5         0.9         6.3         6.0         0.2
2045          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2046          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2047          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2048          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2049          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2050          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2051          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2052          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2053          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2054          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2055          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2056          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2057          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2058          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2059          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2060          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2061          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2062          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2063          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2064          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2065          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2066          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2067          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2068          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2069          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2070          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2071          1.3         4.4         3.5         0.9         6.3         6.0         0.1
2072          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2073          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2074          1.2         4.4         3.5         0.9         6.3         6.0         0.1
2075          1.2         4.4         3.5         0.9         6.3         6.0         0.1
-----------------------------------------------------------------------------------------
\a The real gross domestic product (GDP) is the value of total output
of goods and services expressed in 1992 dollars. 

\b The Consumer Price Index is the annual average value for the
calendar year of the Consumer Price Index for Urban Wage Earners and
Clerical Workers. 

\c The real-wage differential is the difference between the
percentage increases, before rounding, in (1) the average annual wage
in covered employment and (2) the average annual Consumer Price
Index. 

\d The average annual interest rate is the average of the nominal
interest rates, which, in practice, are compounded semiannually, for
special public-debt obligations issuable to the Trust Funds in each
of the 12 months of the year. 

\e Through 2007, the rates shown are unadjusted civilian unemployment
rates.  After 2007, the rates are total rates (including military),
adjusted by age and sex on the basis of the average labor force for
1996. 

\f The labor force is the total U.S.  workforce (including military
personnel); it reflects the average of the monthly numbers of people
in the workforce for each year. 


MAJOR CONTRIBUTORS
========================================================= Appendix III

Francis P.  Mulvey, Assistant Director, (202) 512-3592
Hans Bredfeldt
James Lawson
Christy Bonstelle Muldoon
Barbara Smith
Ken Stockbridge
Bill Williams


*** End of document. ***